This article appeared in Forbes on September 23, 2012.
With the economy sputtering toward what can at best be described as a meager recovery, it seems like an obviously poor time to consider raising taxes on any form of energy. That’s particularly true when it comes the gasoline which fuels not only our cars, but also the nation’s economic engine. Yet that is also precisely what an unholy coalition of big spending liberals and misguided conservative economists is proposing – to raise taxes on carbon and send the economy spiraling toward another recession.
Last month, Rep. Jim McDermott (D-WA) introduced the “Managed Carbon Price Act of 2012,” a bill that would require greenhouse gas emissions to be reduced by 80% from 2005 levels over the next 42 years – ultimately leaving the United States with per capita emissions levels lower than that of Haiti today. The bill is not going anywhere during the limited time remaining in the current Congress, but it’s part of a troubling growth in the level of support for enacting carbon taxes in the near future.
At the fifth annual National Clean Energy Summit held in Las Vegas last month, Senate Majority Leader Harry Reid expressed his hope of enacting a carbon tax by next year. Senate Environment and Public Works Chairman Barbara Boxer went as far as to say that she would like to see it included in a year-end budget deal. And it’s not just those on the left pushing for the tax. A few conservatives and Republicans are also quixotically jumping on the bandwagon.
The American Enterprise Institute, for instance, has recently hosted a series of events designed to brainstorm ways to sell the public, and in particular small government conservatives, on the idea of a tax on carbon. Former GOP Congressman Bob Inglis, who proposed a carbon tax bill while in Congress before he was defeated by a Tea Party primary challenger, has teamed up with supply side economist Art Laffer and created a new institute to push for carbon taxes.
The motives of the left in pushing for a tax are easy to understand, they want more “revenue” to spend. A recent paper from the MIT Global Change Institute estimated one carbon tax proposal would generate $1.5 trillion over ten years, and politicians and the media immediately began to salivate at the idea of using such a tax as an excuse to further expand the burden of government spending. The conservatives, in contrast, claim to want only a revenue neutral tax, trading carbon taxes for reductions in other, more economically destructive, tax rates, such as on income. In theory this is not a bad argument, but in practice it is rather naive.
If the political climate was such that cap-and-trade or other big government carbon regulations were on the horizon, proffering a more economically efficient carbon tax as an alternative might not be a bad strategy from a do-the-wrong-thing-in-the-least-destructive-fashion perspective. But that is not the case. Cap-and-trade is currently a nonstarter, and if the legislative will existed to undo destructive EPA carbon regulations – such as a proposed cap on carbon emissions for new energy plants – then it wouldn’t be necessary to even offer an alternative. After all, none on the left who otherwise support these EPA regulations are going to trade them away, even for a new tax.
More generally, the very idea of offering a new tax in exchange for lower rates elsewhere is flawed. Even if leftists agree to lower taxes on income to keep a new carbon tax revenue neutral, there’s nothing to stop them from raising rates in the future. On the other hand, given the love politicians have for taxes, eliminating an entire tax would be much harder. A similar logic can be seen in the experience of Europe, where less economically destructive value-added taxes did not replace income taxes, but instead helped usher in the bloated, unsustainable European welfare states which are today circling the drain.
A carbon tax wouldn’t produce the same kind of massive influx to the government coffers as seen in Europe with their VATs, but it will lead to more government spending just the same. Politicians spend new revenue, they don’t return it through lower tax rates.
Even if you’re the type of person who lets hope triumph over experience, the carbon tax falls flat on its own logic. If the goal is to ensure that the costs of carbon are included in the price of fuels that emit it, then we can already declare mission accomplished. Federal, state and local governments already tax fuel. They aren’t called carbon taxes, but they are functionally the same. They raise the price of fossil fuels, just like a carbon tax would. According to Marlo Lewis of the Competitive Enterprise Institute, these taxes are in many states already high enough to account for even the most extreme estimate of what the EPA and 11 other federal agencies calculated the cost of carbon emissions to be. To pile a new carbon tax on top of existing fuel taxes, by extension, would mean setting the price well above that justified by the costs of any negative externalities. It would be its own form of market distortion.
No matter how you slice it, carbon taxes are a bad idea. Unfortunately, and like so many other bad ideas in Washington, it’s one that just doesn’t seem to go away. We need to focus instead on growing the economy by removing government barriers to growth, not look for new ways to further ensnare it with unnecessarily high energy costs.